Copyright 2018 Mitul Kotecha

This week there a number of key events to focus attention on including European Central Bank (ECB) policy meeting, Federal Reserve FOMC March minutes, the commencement of India’s general elections, China data, and further Brexit developments as UK Prime Minister May tries to gain a further short extension to the Brexit deadline, until June 30.

The better than expected US March jobs report, revealing a bigger than expected 196k increase in jobs, with a softer than expected 0.1% monthly increase in hourly earnings, which effectively revealed a firm jobs market, without major wage pressures, helped US markets close off the week on a positive note. The data adds to further evidence that the Fed may not need to hike policy rates further.

The European Central Bank decision is likely to prove uneventful though recent comments by ECB President Draghi have fuelled speculation that the central bank will introduce a tiered deposit system to alleviate the impact of negative rates on banks. EUR is unlikely to benefit from this. Separately Fed FOMC minutes will be scrutinised to ascertain how dovish the Fed has become as the markets shift towards pricing in rate cuts, but it is unlikely that the minutes provide further fuel to interest rate doves.

Friday is the deadline to agree on an extension with the EU to prevent a hard Brexit. Meanwhile PM May is set to restart talks with opposition Labour Party leader Corbyn to thrash out a cross party agreement on Brexit terms ahead of an EU summit on Wednesday that will look at her request for a Brexit extension until June 30. GBP has lost momentum lately and investors appear to be fatigued with the daily Brexit news gyrations.

Meanwhile, US-China trade talks appear to be edging towards some sort of a deal while Chinese data this week is also likely to be supportive for risk assets. As China eases financing conditions, evidence of a pick up in the credit impulse will be evident in March aggregate financing, new loans and money supply data this week. Meanwhile China’s March trade data is likely to look better or at least less negative than over recent months. This suggests that risk assets will likely fare well this week.

India will be in the spotlight as India’s multi stage elections kick off on Thursday. Prime Minister Modi is in good stead to ahead of elections, boosted by his government’s reaction to recent terrorist attacks on Indian paramilitary in Kashmir. Concerns that Modi’s ruling BJP would lose a significant amount of seats in the wake of state election losses towards the end of last year have receded. Nonetheless, election uncertainties may keep the INR on the backfoot this week.

This is yet another important week for Brexit deliberations as UK Prime Minister May, under pressure to resign, may bring her Brexit deal agreed with European Union back to Parliament. Parliament could vote on different Brexit options in a series of indicative votes as early as Wednesday, including possible options of a soft Brexit or second referendum. MPs will decide today whether to take control of the parliamentary agenda. GBP meanwhile continues its two steps forward, one step back trajectory, but appears to be finding solid demand on any down step.

Also in focus this week will be a number of Fed speakers who will speak at a time when bond yields are sliding globally. Markets were roiled by growth worries at the end of last week following a sharp drop in German manufacturing confidence (The Markit/BME PMI fell to 44.7 in March from 47.6 in February), which dampened hopes that weakness in the Eurozone economy would be temporary. Taken together with dovish comments from G10 central bankers, the net result was an inversion of the yield curve and German bond yields turned negative. Such signs have in the past been associated with the onset of a recession.

Despite a host of factors including lower US yields, a more dovish Fed stance, markets shifting towards pricing in US rate cuts, and restrained USD, emerging market (EM) assets have not benefitted greatly. EM assets are torn between these factors on the one hand and global growth concerns on the other. A host of idiosyncratic factors, whether it is political noise and pension reform in Brazil, or the impending Moodys’ review of South Africa this week, Thai elections etc, etc, are also resulting in more discriminatory investing.

US –China trade talks will also continue to be in focus this week, with the US administration’s Lighthizer and Mnuchin schedule to be in Beijing on March on Thursday and Friday to meet with China’s Lie He, who is planned to travel to Washington in the week after. Structural issues such as technology transfers, state subsidies and intellectual property and the removal of all tariffs, have been stumbling blocks so far. Latest reports reveal that China is refusing to back down on US demands that it eases restrictions on digital trades. The absence of progress on trade talks are yet another reason for markets to trade under a shadow.

Markets start this week on a positive note in the wake of 1) the strong US December jobs report, which revealed a larger than expected increase in non-farm payrolls of 312k and decent growth in average hourly earnings of 0.4% m/m, 2) positive comments by Fed Chairman Powell on the US economy, while noting that the Fed will be patient if needed and 3) the 1% banks’ reserve requirement (RRR) cut by the PBoC in China. Powell’s comments will also weigh on the USD this week against the background of long USD positioning, helping EM currencies. He speaks again on Thursday.

Events this week will be key in determining the tone for markets further out, however. In the UK parliament returns after its holiday break, with debate on the “meaningful vote” taking place over the week and markets will watch for any sign that May’s proposed deal gains traction. The FT reports that she is facing a fresh challenge, with senior MPs signing up to block the government from implementing no-deal measures with parliament’s consent. x

China’s RRR cut (announced on Friday) will help to put a floor under risk sentiment. The total 1% easing will release RMB 800 bn of liquidity, according to the PBoC, ahead of the Chinese New Year. A cut was widely expected in the wake of weak data and strongly hinted at by Premier Li prior to the PBoC announcement. The PBoC already cut the RRRs four times in 2018, and more should be expected to come, including MLF and other targeted easing.

Focus will centre on trade talks between US and Chinese officials beginning today. Both sides are under pressure to arrive at a deal in the wake of pressure on US asset markets and weakening Chinese growth, but the differences between the two sides remain large. The US delegation will be led by Jeff Gerrish, the deputy trade representative and he is joined by officials from the agriculture, energy and treasury departments, suggesting that talks will centre on more detailed content.

There are a plethora of issues weighing on asset markets though sentiment has improved slightly today. Weak Chinese trade data over the weekend and a revision lower to Japanese GDP data yesterday added to growing global growth concerns, against the background of waning hopes of a resolution to the US-China trade war.

US administration comments that there was a hard deadline for trade talks have not helped sentiment either. News today that Chinese Vice Premier Liu He spoke with US Treasury Secretary Mnuchin and US Trade Rep Lighthizer on a timetable and road map on trade talks provided some relief, however.

In the US, growth expectations are undergoing a shift and talk of a Fed pause is growing. This would be considered as good news for EM if it wasn’t for the fact that a pause could be due to US growth concerns rather than any sense that the Fed was approaching its terminal rate. US November CPI, retail sales, and industrial production data will give more clues, but I still think the Fed policy rates next week.

In the UK, Brexit worries have intensified following the decision by Prime Minister May to the delay the vote on a deal in parliament given she would most likely would have faced a defeat had it gone ahead. May will now go on a tour of European capitals to try to improve the Brexit deal but prospects don’t look good, especially as European Council president Tusk has already ruled out any negotiation of the deal and in particular the Irish backstop.

GBP was pummeled as a result of the delay and will continue to struggle in the short term given the lack visibility. A revised deal appears difficult while a hard Brexit and even a new referendum are all on the table.

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